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State Attorneys General Challenge SEC's Authority in Kraken Lawsuit

State attorneys general from eight U.S. states challenge the SEC's authority in the lawsuit against Kraken, arguing that the SEC has overstepped its delegated power.

Eight state attorneys general in the U.S. have jointly filed an amicus brief arguing that the Securities and Exchange Commission (SEC) overstepped its authority in the lawsuit against cryptocurrency exchange Kraken. They contend that the SEC's enforcement action against Kraken is based on "undelegated authority."

The attorneys general, representing states including Arkansas, Iowa, Mississippi, Montana, Nebraska, Ohio, South Dakota, and Texas, along with industry lobbyists, filed the brief on Feb. 29. They stated that Congress has not delegated the authority to the SEC to regulate crypto assets absent an investment contract.

According to the filing, the SEC's attempt to expand the definition of an "investment contract" could lead to the preemption of state consumer protection laws. The attorneys general argued that some state laws provide better consumer protection than federal securities laws and should not be superseded by the SEC's actions.

Kraken filed a motion on Feb. 22 seeking to dismiss the SEC's lawsuit, citing similar concerns of regulatory overreach. Kraken argued that the SEC's lawsuit could set a dangerous precedent by granting the agency too broad of an authority.

In response to the SEC's claims that Kraken operated an unlicensed securities exchange, broker, dealer, and clearing agency, Kraken released a blog post disputing these allegations. The exchange argued that the SEC failed to provide evidence of actual "contracts" between customers and the exchange.

The SEC filed its lawsuit against Kraken in November, alleging that the exchange was operating without registration, commingling client funds, and failing to prevent conflicts of interest. Similar complaints have been brought by the SEC against other crypto-related firms, including Coinbase, Binance, and the U.S. branch of Bittrex.

The outcome of these legal battles could have significant implications for the regulatory framework surrounding cryptocurrencies and how they are classified by the SEC.